UniCredit trims capital guidance after U.S. dispute, Turkey hit

MILAN (Reuters) - Italy’s top bank UniCredit (CRDI.MI) missed third-quarter profit forecasts after writing down its stake in a Turkish bank by almost $1 billion and covering for an expected settlement of an Iran sanctions case with the United States.

The bank stuck to its 2019 profit goal saying it would step up cost cuts to offset lower revenues but trimmed its core capital target after a hit in the quarter from a falling Turkish lira and higher risk premiums on Italian bonds.

Turkey’s economic woes and its currency slump have hit the country’s banking sector, compounding trouble UniCredit faces at home, where spending plans by Rome’s new populist government have sent the state’s debt costs soaring.

UniCredit said on Thursday it had booked an 846 million euro ($967 million) impairment on its 41 percent indirect stake in Yapi Kredi (YKBNK.IS). Shares in Turkey’s sixth-largest bank have lost 54 percent in euro terms so far this year.

But Mustier said it was in shareholders’ best interest for UniCredit to maintain its Turkish investment and that it was ready to support Yapi’s potential capital needs.

UniCredit also booked 741 million euros in charges and provisions before settling a dispute with the U.S. Department of Justice over alleged sanctions violations in dealings with Iranian companies.

Any future impact from the accord, expected in the first quarter of 2019, would not be material, it said. The bank is conducting an internal investigation to assess its compliance with the sanctions.

Net profit was 29 million euros, missing a 907 million euro average estimate in a company-provided analyst consensus.

Net interest income and fees were in line with expectations, signaling the bank’s restructuring progressed.

“We’re being super conservative on the Turkish side and the trading side and we compensate with lower costs,” Mustier said.

Analysts see UniCredit’s strategy centered on cost cuts as a source of strength when growing political uncertainty, a slowing economy and market turmoil over Italian assets raise doubts about the ability by banks to grow revenues.

Italian banks have mostly avoided selling bonds since market turmoil started in mid-May, but CFO Mirko Bianchi said UniCredit would tap markets in the first quarter of 2019 to issue loss-absorbing debt it must hold as Italy’s only systemically-significant bank.

To counter higher funding costs, some banks are increasing lending rates. Bianchi said UniCredit, which rapidly grew customer loans in the quarter, expected loan rates to bottom out at the end of the year.

UniCredit’s fully-loaded core capital ratio fell to 12.11 percent in September from 12.51 percent at the end of June due to shrinking reserves linked to currencies and government bonds.

Mustier said UniCredit would reduce the impact from Italian bond yields in future by booking any new purchases among assets held to maturity.

The banks sees its core capital next year at 12-12.5 percent compared with a previous estimate of more than 12.5 percent.